Weather Derivatives in Russia:

Insuring Farmers Against

Temperature Fluctuations

Eric Carkin, Stanislav Chekirov,

Anastasia Echimova, Caroline Johnston,
Congshan Li, Vladislav Secrieru,
Alyona Strelnikova, Marshall Trier,
Vladislav Trubnikov 1
Presentation Outline

Problem Identification

Goals & Objectives

The Financial Instrument

The Financial Simulation Tool

22
 Background

Russian agriculture sector

Employment:
12% of total workforce

Risks:
Temperature can
cause up to a 40%
deficit in crop yields

How can farmers protect themselves? 3

 Current Agriculture Protection

Insurance
Protects from:
large-scale events Government
Problems: Subsidies
does not cover high- Protects from:
probability low-risk large-scale events
events
Problems:
- acreage requirements
-“arbitrary” payouts

4
 Our Solution
Weather
Derivative Weather Derivative
Type of financial option
with a payout based Protects from:
off of weather conditions repeated small-scale
Unfavorable Growing events
Conditions

Problems:
not very popular
10 15 20 25 30
Degrees Celsius

5
 Project Goal and Objectives

Goal:
Create an Academically-Based (Proof-of-Concept) Weather Derivatives
Pricing System to Insure Farmers within Russia

Objectives:
Determine Relationship Price Weather
Create Excel Tool to Simulate
Between Temperature and Derivative
Derivative’s Financial Impact
Crop Yield Options

6
 Areas of Focus

Moscow

Krasnodar
Omsk 7
 Growing Degree Day
n

𝚺
i =1
n
,n ,n

GDD for One Year

Wheat
Corn
Potato
Yield in Bushels

8
Cumulative GDD
Collecting Data For Derivative Pricing

Annual Plant/Harvest
Annual Temperature
Dates

Cumulative GDD

9
 Collecting Data For Tool

Historic Crop Yields Annual Crop GDD

Crop Price Forecasts GDD Effect on Yield

Predicted Yield
Value

10
Collecting data from the Bloomberg terminal
 Pricing the Derivative
more historical data added, creates stronger model
Predict future GDD to price premiums for farmers

Historical Burn Analysis

Average historical GDD’s = prediction of future GDD
Cumulative GDD

Year
11
Payout from Derivative

more historical data added, creates stronger model

Premium = $250
Expected GDD = 350
Farmer profits:
GDD < 325 or
GDD > 375

Farmer loses:
325 ≤ GDD ≤ 375

12
Profit from Derivative

more historical data added, creates stronger model

Premium = $250
Expected GDD = 350

Farmer profits:
GDD < 325 or
GDD > 375
Farmer loses:
325 ≤ GDD ≤ 375

13
Loss from Derivative

more historical data added, creates stronger model

Premium = $250
Expected GDD = 350

Farmer profits:
GDD < 325 or
GDD > 375

Farmer loses:
325 ≤ GDD ≤ 375

14
Simulation Tool:
A Quick Demonstration

15
Drawbacks

Financial Returns
Optimization of Payments

Data Collection
Gap for Krasnodar

Yield Response
Inaccuracies and Regressions

16
 Future Recommendations:
The Tool

Test Tool with Optimize Parameters of

Real Farmers Pricing
Integrate
Additional Test Tool with
Methods of Tool Real Farmers
Implementation

Create Rainfall- Optimize

Indexed Weather Parameters of
Derivative Pricing

17
Future Recommendations:
The Tool

Identify More
Accurate GDD
vs. Yield
Relationship

18
 How to Bring it to the Real-World

Most derivatives are traded

OTC

RTS (Russian OTC Platform)

We Play as Guarantor of Safe Bring to market using RTS or
Deal any other LETS

Farmers/Energy
Hedge Funds
Companies
19
 Conclusion
Determine Relationship
Between Temperature and
Crop Yield

Price Weather
Derivative
Options

Create Excel Tool to Simulate

Derivative’s Financial Impact

20
 Acknowledgements
Financial University Under the Government of the Russian Federation
Worcester Polytechnic Institute
Alexander Ilyinsky
Tatiana Goroshnikova
Svetlana Chugunova
Oleg Pavlov
Stephan Sturm
Gbetonmasse Somasse
Michael Radzicki
Michael Johnson
Anton Losev
Svetlana Nikitina

21
Thank You For Your Time!
 References
more historical data added, creates stronger model
● (Slide 15) Altmann, G. (2012). Keyboard [Photograph]. Retrieved from

https://www.google.com/url?q=https://pixabay.com/en/keyboard-computer-hardware-keys-70506
● British Potato Council. (2006, August). Target market report for the export of GB seed potatoes. BPC Target Market
Report Russia. Retrieved from https://potatoes.ahdb.org.uk/sites/default/files/publication_upload/
BPC%20MIS%20Report%20Russia.pdf
● (Slide 10) FAO. (2017). Russian Federation Crop Calendar [Image File]. Retrieved from
http://www.fao.org/giews/countrybrief/country.jsp?code=RUS
● (Slide 4) National Association of Agricultural Insurers. (2014). NSA Logo [Image File]. Retrieved from
http://www.naai.ru/eng/

● Pavlova, V. N., Varcheva, S. E., Bokusheva, R., & Calanca, P. (2014). Modelling the effects of climate variability on
spring wheat productivity in the steppe zone of Russia and Kazakhstan. Ecological Modelling, 277, 57-67. Retrieved
from http://www.sciencedirect.com/science/article/pii/S030438001400057X

● (Slide 1) Pexels. (2017). Farm [Photograph]. Retrieved from

https://pixabay.com/en/farm-field-grain-grass-
nature-1837099/
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● Veggie harvest. (2016). Corn Growing and Harvest Information. Retrieved from
 References
more historical data added, creates stronger model

● (Slide 4) Russian Government (n.d.) Russian Ministry of Agriculture Logo [Image file].
Retrieved fromhttps://en.wikipedia.org/wiki/File:Russian-agriculture-ministry-emblem.gif
● (Slide 19) RTS Board system logo (2017) Association of Participants In the Financial Market “Non-Commercial
Partnership For the Development of the RTS Financial Market”. Retrieved from
http://nprts.ru/ru/otc_market/board/
● (Slide 22) Russian Farmers [Image file]. (2015). Retrieved from

http://chemodur.livejournal.com/435224.html

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Pricing Equations
more historical data added, creates stronger model

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Pricing Equations
more historical data added, creates stronger model

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Pricing Equations

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Pricing Equations

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The structure of Blockchain
technology

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The system of smart contracts

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